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The issue this appeal presented for the New Jersey Supreme Court's review centered on an agreement for the sale of a residential property and a subsequent lease and repurchase agreement, specifically whether the transactions collectively gave rise to an equitable mortgage, violated consumer protection statutes, or contravened its decision in "In re Opinion No. 26 of the Committee on the Unauthorized Practice of Law," (139 N.J. 323 (1995)).

In 2007, defendant Barbara Felton faced foreclosure proceedings with respect to her unfinished, uninhabitable home and the land on which it was situated. Felton and plaintiff Tahir Zaman, a licensed real estate agent, entered into a written contract for the sale of the property. A week later, at a closing in which neither party was represented by counsel, Felton and Zaman entered into two separate agreements: a lease agreement under which Felton became the lessee of the property, and an agreement that gave her the option to repurchase the property from Zaman at a substantially higher price than the price for which she sold it.

For more than a year, Felton remained on the property, paying no rent. She did not exercise her right to repurchase. Zaman filed suit, claiming that he was the purchaser in an enforceable land sale agreement, and that he therefore was entitled to exclusive possession of the property and to damages. Felton asserted numerous counterclaims, alleging fraud, slander of title, violations of the Consumer Fraud Act (CFA), and violations of other federal and state consumer protection statutes. She claimed that the parties’ transactions collectively comprised an equitable mortgage and constituted a foreclosure scam, entitling her to relief under several theories. She further contended that the transactions were voidable by virtue of an alleged violation of "In re Opinion No. 26."

A jury rendered a verdict in Zaman’s favor with respect to the question of whether Felton knowingly sold her property to him. The trial court subsequently conducted a bench trial and rejected Felton’s remaining claims, including her contention that the transactions gave rise to an equitable mortgage and her allegation premised upon In re Opinion No. 26. An Appellate Division panel affirmed the trial court’s judgment.

The Supreme Court affirmed in part and reversed in part the Appellate Division’s determination. The Court affirmed the jury’s determination that Felton knowingly sold her property to Zaman. Furthermore, the Court affirmed the trial court and Appellate Division's decisions that Felton had no claim under the CFA, that this case did not implicate "In re Opinion No. 26," and that Felton’s remaining claims were properly dismissed.

The Court reversed, however, the portion of the Appellate Division’s opinion that affirmed the trial court’s dismissal of Felton’s claim that the parties’ agreements constituted a single transaction that gave rise to an equitable mortgage, adopting an eight-factor standard for the determination of an equitable mortgage(1) set forth by the United States Bankruptcy Court in "O’Brien v. Cleveland," (423 B.R. 477 (Bankr. D.N.J. 2010)).

The case was remanded to the trial court for application of that standard to this case, and, in the event that the trial court concludes that an equitable mortgage was created by the parties, for the adjudication of two of Felton’s statutory claims based on alleged violations of consumer lending laws, as well as several other claims not adjudicated by the trial court.

In O Brien, supra, the Bankruptcy Court scrutinized a residential sale that was conducted under the threat of imminent foreclosure, in which the parties agreed that the seller would remain in his home and buy the home back from the buyer in a series of payments over time. 423 B.R. at 483-86. It identified eight factors to assist trial judges in determining whether a given transaction gives rise to an equitable mortgage:

[(1)] Statements by the homeowner or representations by the purchaser indicating an intention that the homeowner continue ownership;

[(2)] A substantial disparity between the value received by the homeowner and the actual value of the property;

[(6)] Disparity in bargaining power and sophistication, including the homeowner s lack of representation by counsel;

[(7)] Evidence showing an irregular purchase process, including the fact that the property was not listed for sale or that the parties did not conduct an appraisal or investigate title;

[(8)] Financial distress of the homeowner, including the imminence of foreclosure and prior unsuccessful attempts to obtain loans. [Id. at 491.]

Under the O Brien framework, the court considers not only the form of the transaction itself but circumstances that can motivate a party to disguise a mortgage secured by a property as a sale of land and indications that both parties intend the seller to retain the land notwithstanding the purported sale.

We concur with the District Court that the eight factors set forth in O Brien are useful and consistent with New Jersey equitable mortgage jurisprudence. Johnson, supra, 698 F. Supp. 2d at 470. We adopt the O Brien factors as a comprehensive and practical standard to guide trial courts as they determine whether a particular transaction, or series of transactions, gives rise to an equitable mortgage.

We remand the matter to permit the trial court to make findings addressing each of the eight factors that comprise the O Brien test.

CBC News: Betrayal of Trust (A CBC investigation reveals how lawyers across Canada have misappropriated and mishandled clients money, to the tune of tens of millions of dollars, or sometimes even charging vulnerable people top dollar for shoddy services)

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